While investors kept tariffs and trade disputes in mind in August, a new earnings season provided Wall Street with a lift. Blue chips especially benefited: the Dow Jones Industrial Average rose 4.71% for the month. Broadly speaking, strong corporate profits and domestic economic data gladdened the bulls, even as question marks about global commerce flashed.1

Two other developments concerning tariffs made headlines. On July 1, Canada acted to impose a 25% import tax on American steel products and a 10% import tax on assorted U.S. consumer, food, and agriculture exports coming through its borders. On July 25, President Trump and European Commission President Jean-Claude Junker agreed to lower the respective industrial tariffs the U.S. and E.U. had announced and postpone others (such as the planned 25% U.S. tax on European-built autos) pending further talks.3,4

A new report from the Department of Labor showed a net June gain of 213,000 jobs. That topped the 195,000 projected by Bloomberg’s consensus forecast. Headline unemployment increased to 4.0% from 3.8% in June, while the U-6 rate, counting the underemployed, rose 0.2% to 7.8%, but those changes reflected the growth in the labor force participation rate. Wages were rising 2.7% a year at the end of the second quarter.5

Consumer costs, however, were increasing at 2.9% per year, according to the latest Consumer Price Index. That was the highest inflation rate seen since February 2012. Well beneath the headline number, the core CPI (which removes food and fuel prices) was up just 2.3%, annually, through June. The large difference between the two CPIs reflects the impact of a 30.8% year-over-year rise in the price of fuel oil and a 24.3% annualized gain for the cost of gasoline. (The June Producer Price Index showed yearly wholesale inflation running at 3.4%.)6,7

The Institute for Supply Management’s purchasing manager indices looked very strong as spring gave way to summer. In June, ISM’s non-manufacturing PMI achieved a mark of 59.1, improving 0.5 points. The June and July readings for ISM’s manufacturing PMI were also excellent: 60.2, then 58.1. Federal government reports showed durable goods orders increasing 1.0% in June; industrial output, 0.6%; manufacturing output, 0.8%.6,8

On Main Street, consumer confidence held up even as households thought about the potential impact of tariffs on the economy. The Conference Board’s index rose 0.3 points in July to 127.4, and the University of Michigan’s barometer progressed from 97.1 in its preliminary July edition to a final July mark of 97.9.6

Fresh Department of Commerce data showed consumers spending at a healthy rate at the end of spring. Personal spending was up 0.4% in June, with overall retail sales advancing 0.5%; all this was helped by a gain of 0.4% for personal incomes.6

What if the Brexit occurred without any deal defining how the European Union and the United Kingdom could continue to do business? That troubling question was on many minds in Europe in July. U.K. Prime Minister Teresa May publicly stated back in 2017 that “no deal for Britain is better than a bad deal for Britain,” and the E.U. has been advising corporations and governments to prepare for the possibility of a “hard” Brexit. A “no-deal” Brexit is a real risk, with the customs border between Northern Ireland (part of the U.K.) and Ireland (part of the E.U.) as the major sticking point. The Netherlands, Belgium, and the U.K. have begun to stockpile cash and resources in case of potential economic shortages or hardships caused by a trade chasm. The projected date for the Brexit is March 29, 2019, but it could be postponed. Fifty-one percent of U.K. respondents to a July Sky News poll felt the Brexit was a bad move for the country, and 78% felt May’s government was doing a poor job of negotiating the separation.11,12

Some crops did post big gains, while others fell hard. July winners included wheat at +11.57%, corn at +6.36%, cotton at +5.61%, and soybeans at +5.25%. Among the losers: coffee at -2.44%, sugar at -8.77%, and cocoa at -12.88%.15

Home values continued their healthy appreciation. The latest 20-city S&P CoreLogic Case-Shiller index showed home prices up 6.5%, year-over-year, through May. Prospective buyers could take heart in the fact that mortgage rates were little changed in late July from where they were in late June. Freddie Mac’s Primary Mortgage Market Survey from June 26 listed the mean interest rate on the 30-year FRM at 4.55%, the mean rate on the 15-year FRM at 4.04%, and the average interest rate for the 5/1-year ARM at 3.87%; in the July 26 PMMS, the respective numbers were 4.54%, 4.02%, and 3.87%.6,17

The last month of the second quarter also witnessed less groundbreaking. In June, developers made 12.3% fewer housing starts and arranged 2.2% fewer building permits than in May, according to the Census Bureau.6

T I P O F T H E M O N T H

Summer is an ideal time to organize your tax records. Contact your CPA and ask for a mid-year tax check-up. Opportunities for savings may emerge.

The Nasdaq, Dow, Russell, and S&P are all firmly in the green for 2018 at this date. As the closing bell rang on July 31, their year-to-date numbers were as follows: DJIA, +2.82%; S&P, +5.34%; COMP, +11.13%; RUT, +8.81%. When that trading session ended, the four benchmarks settled at these levels: DJIA, 25,415.19; COMP, 7,671.79; S&P, 2,816.29; RUT, 1,670.80.1,18

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

The second half of the year started with some promise: earnings and fundamentals largely came through and brightened the mood of investors contending with unanswered questions about global trade. July was the S&P 500’s fourth straight winning month, and 2018 is the twelfth year in the past 90 years in which the S&P has had an April-July win streak. In all previous 11 years featuring such a streak, the S&P advanced across the rest of the year. Will history repeat in 2018? Maybe not, but 11 for 11 is certainly encouraging. A strong finish to 2018 is by no means assured, as trade and diplomatic concerns, probable Federal Reserve rate hikes, and perhaps even a slowing U.S. business cycle cloud the horizon. The market will also exit earnings season this month, and that may leave less for investors to get excited about. Late-summer doldrums could certainly overtake Wall Street, but that does not rule out the possibility of a bullish fourth quarter.22

Q U O T E O F T H E M O N T H

“Drive thy business or it will drive thee.”

Benjamin FRANKLIN

UPCOMING RELEASES

What will investors pay attention to across the rest of August, in addition to the remaining earnings calls? They will look at the latest jobs report from the Department of Labor and ISM’s newest non-manufacturing PMI (8/3), the July PPI (8/9), the July CPI (8/10), July retail sales and industrial output (8/15), the Census Bureau’s latest snapshot of residential construction activity (8/16), the initial August University of Michigan consumer sentiment index and the Conference Board’s July leading indicators index (8/17), the NAR’s July existing home sales report (8/22), the Census Bureau’s latest new home sales announcement (8/23), July hard goods orders (8/24), a new Conference Board consumer confidence index (8/28), the second estimate of Q2 economic expansion and the NAR’s report on July pending home sales (8/29), July consumer spending figures and the July PCE price index (8/30), and lastly, the final August University of Michigan consumer sentiment index (8/31).

T H E M O N T H L Y R I D D L E

The 22nd and 24th Presidents had the same biological mother and father, yet were not brothers. How was this possible?

LAST MONTH’S RIDDLE: Getting into it is often easy, as it may not require speech or much thought. It is often very difficult to get out of, though. What is it?

ANSWER: Trouble.

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As the markets are more aggressively fluctuating it is causing and creating some anxiousness and concern about risk.

Market corrections are normal.
--The lack of these in the last 16 months is NOT normal.

We take risk very seriously and talk with you often about your Risk number. What is a comfortable draw-down on overall assets?
--It is historical for the market to have an annual pull back of 13.6% (the S&P 500 index over the last 25 years)

Your comfort level is very important to us. We understand risk and market gyrations after 35 years in the business, and we can offer our wisdom and experience.
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- Bette Davis

QUARTERLY TIP

New parents should strive to insure themselves. That means life insurance coverage for both spouses or partners. In the event of one spouse or partner’s untimely death, life insurance benefits may replace lost income and help the surviving parent pay for child care costs.

A review of Q2 2017

Special Note from Lisa & Mikiel:

Fred Fern, the founder and owner of Churchill Management Group was in our office recently for a visit. Fred shared with us his discipline & passion he has for managing risk with our clients:

The Discipline:
Team Approach
Process for Fundamentals, Sentiment & Tehnicals
Depth of Experience

The Passion:
Three Generations of Family in Management
Commitment to achieve and serve clients risk management objectives
Conviction to reach out and talk one on one with clients and us

Churchill continues to be highly ranked with Barron's - they were the #1 Money Manager of the Year in 2016, with G.I.P.S. audited reporting.* The company currently manages $4.6 billion in assets and pension funds.

Fred has shared with us many stories of how he has founded, grown and sustained his highly effective and productive business.

If you are interested in learning more about Churchill Management Group - please contact our office and we would be happy to talk with you. Please call us at 512 497-7526 or email us at info@planningworks.biz

THE QUARTER IN BRIEFAfter a remarkable first quarter, the stock market cooled off slightly in Q2 – but investors still saw substantial gains. Strong earnings helped take Wall Street’s collective mind off a decidedly mixed bag of economic signals. Consumers remained confident as the quarter unfolded; although hiring, inflation, and consumer spending weakened. Home sales declined, then rebounded. Overseas, factory activity in China and the eurozone showed improvement, and foreign equity benchmarks continued climbing. Many commodities took sizable Q2 losses. When the quarter ended, the bulls were still firmly in charge.1

DOMESTIC ECONOMIC HEALTHAs one quarter ends, the Bureau of Economic Analysis commonly makes its third and last assessment of the prior quarter’s economic growth (though, even this “final” estimate may be adjusted in later years). In the last week of June, the BEA announced a “final” Q1 growth number of 1.4%, which was nothing to celebrate. Would Q2 growth come in above 2%?2

Second-quarter consumer spending data from the Department of Commerce raised some concerns about reaching that percentage of growth. While April and May brought solid growth for personal incomes (0.3% in the former month and 0.4% in the latter), the gain in personal spending fell from 0.4%, in the fourth month of the year, to 0.1%, in the fifth. Retail sales, too, tailed off: after rising a robust 0.4% in April, they fell 0.3% for May.2

Households did feel good about the state of the economy and their financial prospects. At final readings of 97.0 in April, 97.1 in May, and 95.1 in June, the University of Michigan’s consumer sentiment index stayed well north of its 86.1 historical average. The Conference Board’s index ended the quarter at a very high mark of 118.9.2,3

Hiring figures from the Department of Labor were somewhat weak. Monthly employment reports showed that U.S. firms added 174,000 net new jobs in April and 138,000 net new jobs in May. (In March, the number had been just 50,000.) Was the job market simply at capacity? Only time would tell. Reductions in the labor force participation rate helped send both the headline jobless rate and the U-6 rate, factoring in the underemployed, to notable lows. By June, the headline (U-3) rate had dipped to 4.3%, a level unseen in 16 years; the U-6 rate had fallen to a 10-year low of 8.4%.4

On the manufacturing front, the news appeared better. The Institute for Supply Management’s factory purchasing manager index rose to 57.8 in June, a 34-month peak. This was after readings of 54.8 in April and 54.9 in May. ISM’s service sector PMI was also well above the expansion line of 50 in April and May, displaying respective readings of 57.5 and 56.9 in those months.5,6

Still, federal government reports showed manufacturing and industry production falling off in Q2. Industrial output jumped 1.1% in April; then, flattened in May. Manufacturing output went from a 1.1% gain to a 0.4% retreat. Hard goods orders were down 0.9% in April; then, down 1.1% a month later.2

Annualized inflation declined during the quarter. The May Consumer Price Index showed only a 12-month gain of 1.9% and just 1.7% for core prices. A month earlier, yearly inflation had been at 2.2% with the core CPI rising 1.9%. Did wholesale inflation also lessen? The headline number did, ticking down 0.1% in May to 2.4%. The core Producer Price Index was up 2.1% year-over-year through May, a 0.2% increase from April.2

The Federal Reserve lifted the federal funds rate by another quarter point in June to a target range of 1.00-1.25%. It also disclosed it would begin reducing its massive bond portfolio “this year,” which could put pressure on long-term interest rates. The central bank intends to let $6 billion of Treasuries and $4 billion per month in agency debt and mortgage-linked securities mature per month to start. In late June, all 34 of the country’s largest banks passed the Fed’s annual stress tests – a milestone unseen since their adoption seven years ago.7,8

GLOBAL ECONOMIC HEALTHEmmanuel Macron’s decisive victory in France’s national election cheered investors concerned about the potential for another crack in the European Union, and it started a rally in the euro, which continued in June after European Central Bank President Mario Draghi commented that “the threat of deflation is gone and reflationary forces are at play.” Investors took those words as a strong hint that the ECB would presently end its quantitative easing. As the quarter concluded, Chancellor Angela Merkel’s reelection seemed probable in Germany; a fourth Merkel term would be another boost to EU economic confidence and stability.1,9

Manufacturing economies accelerated around the world in the quarter. The Markit eurozone factory PMI reached 57.0 in May, and then, 57.4 in June (a 4-year peak). Manufacturing PMIs in Vietnam, India, South Korea, Taiwan, and Japan were all above 50 (the level signifying sector expansion) as Q2 wrapped up. China’s official factory PMI was at 51.2 in May; then, 51.7 in June. Its official service sector PMI came in at 54.5 in May and 54.9 in June.10,11

WORLD MARKETSOne factoid conveys how well global equity benchmarks did in 2017’s first half: 26 of the world’s 30 major indices posted 6-month gains. The last time that happened was in 2009 – and it has only occurred in four other similar intervals within the past two decades.12

Germany’s DAX finished the first half up an impressive 7.4% YTD, and France’s CAC 40 was up 5.3% on the year when Q2 ended. The United Kingdom’s FTSE 100 was 2.4% higher YTD on June 30. India’s Sensex topped the 31,000 level in June, reaching an all-time peak and outdistancing nearly all of its nearby Asia-Pacific benchmarks with an astounding 16.1% first-half advance. The Nikkei Asia300 index did even better, ending the first half of 2017 up more than 21% YTD.13,14

Looking at some regional indexes, the pan-Europe Stoxx 600 index fell 0.5% in Q2, but still had risen 5.0% YTD through June. The MSCI World Index advanced 3.4% in the quarter, to go up 9.4% for the year; MSCI’s Emerging Markets benchmark rose 5.5% in Q2, taking its YTD gain to an impressive 17.22%.13,15

COMMODITIES MARKETS Oil traded under $50 for most of the second quarter, touching a low of $42.05 before rising to finish Q2 at $46.33 on the NYMEX. Gold ended June at $1,241.40; silver, at $16.57.1,16

Losers outnumbered winners in the commodity sector in Q2, and some commodities took steep falls. Iron ore slid 21.37% in the quarter; sugar, 17.60%; gasoline, 11.16%; coffee, 10.95%. Other notable losses came for silver, oil, and cocoa, which were all down between 9-10% for the quarter; heating oil and natural gas gave back roughly 5%. Among the big Q2 winners: oats, up 29.32%; CBOT wheat, up 19.81%; feeder cattle, up 10.43%. Palladium picked up 4.78%; soybean oil; 3.62%; corn; 1.72%; copper, 1.66%.1

The animal protein and grain sectors were the best-performing portions of the commodities market in the quarter, respectively gaining 15.13% and 13.34%. The energy sector fell 7.61%; the precious metals sector, 2.09%; the base metals sector, 1.75%.1

REAL ESTATE Home buying slumped in April and then rebounded during May. In the fourth month of the year, the National Association of Realtors calculated a 2.5% decline in resales – but a 1.1% May gain left them 2.7% improved over the past 12 months. That May gain happened with inventory down 8.4% year-over-year and a median existing home price 5.8% higher ($252,800) than a year before. The Census Bureau said that new home sales dropped 7.9% in April, but they rose 2.9% a month later.2,17

Three other closely-watched housing market indicators weakened in Q2. The Census Bureau’s monthly snapshot of housing starts and building permits showed starts down 2.8% in April and 5.5% in May as well as permits slipping 2.5% for April and 4.9% for May. The year-over-year advance on the 20-city composite S&P/Case-Shiller home price index was 5.9% in the March edition and 5.7% in the April edition (this is a famously lagging indicator). Finally, NAR’s pending home sales index took two small steps back, retreating 1.7% in April and 0.8% in May.2

LOOKING BACK…LOOKING FORWARD A sustained rally with only brief, minor setbacks left the notable U.S. equity and volatility indices at the following levels at the end of Q2: S&P 500, 2,423.41; Dow Jones Industrial Average, 21,349.63; Russell 2000, 1,415.36; Nasdaq Composite, 6,140.42; CBOE VIX, 11.18. The quarterly gains for the big three are noted below; the Russell advanced 2.39% in three months, while the VIX fell 3.12%. The PHLX Oil Service Sector index brought up the rear among U.S. equity indices, staggering to a 22.54% 3-month loss.19

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.

These returns do not include dividends.

With the three marquee U.S. equity indices up between 15-27% in 12 months, investors are naturally skeptical about how long stocks can maintain such powerful momentum. Bulls still rule the Street, though – and bullish analysts see more upside to this market during the rest of 2017. It is true that past performance is no guarantee of future success, but the major Wall Street indices have tended to have a good second half in the past 20 years, regardless of their first-half performance. The Dow and Nasdaq have posted second-half advances during 14 of the past 20 years, and the S&P 500 has followed suit in 13 of the past 20 years. Looking closer at the years featuring these advances, the average second-half rise was 4.31% for the Nasdaq, 3.23% for the Dow, and 2.68% for the S&P. Since 1988, the S&P has never retreated during the second half of a year when it has gained 6% or more in a first half. So, in recent stock market history, when the bulls have been ruling the Street in the first half of a year, they have tended to keep running the rest of the year. Bears might say that the bulls who embrace these statistics are suffering from recency bias, and perhaps, that argument has merit. Then again, bearish analysts have predicted an end to this bull market year after year, and still, it persists.23

g

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MONTHLY RIDDLE

It can fit down a chimney when it is down. It has a hard time going down a chimney when it is up. You can hold it with one hand, and make it expand. What is it?

Last month’s riddle:Three sisters walk toward school with just one small umbrella, which they must all try to fit under. When they reach their school, none of them are the slightest bit wet. How is this possible?

Lastmonth’sanswer:

It didn’t rain on their way to school.

May 2017

THE MONTH IN BRIEFIn April, investors kept one eye on impressive corporate earnings and another on geopolitical developments in Asia and Europe. Earnings ultimately drew the most attention – the Dow Jones Industrial Average rose more than 1% for the month, while the Nasdaq Composite added more than 2%. The latest readings on some key economic indicators were disappointing, but consumer confidence and purchasing manager indices looked good. Positive economic news filtered in from both China and the eurozone.Home sales were up; mortgage rates down. Commodity futures largely struggled. All in all, the month featured more economic positives than negatives.1

DOMESTIC ECONOMIC HEALTH An extremely bullish stock market climate and abundant consumer confidence often coincide. In April, the nation’s most-watched consumer confidence indices remained high; albeit, not as high as they were in March. The Conference Board’s index declined to 120.6, 4.3 points lower than the previous month; the University of Michigan’s household sentiment index ended the month at 97.0, one point lower than its preliminary April mark.2

Job creation had waned in March. The Department of Labor’s employment report showed only 98,000 net new hires in that month. Still, the jobless rate dipped 0.2% to 4.5%. The U-6 rate, measuring both unemployment and underemployment, declined 0.3% to 8.9%. Does all that seem incongruent? Two factors may help explain it. One, the number of unemployed Americans declined by 326,000 during March, for assorted reasons. Two, the DoL uses two different surveys to compile data for its monthly report. One tracks payrolls at businesses; the other, the employment status of individuals.3

Turning from the workplace to the point of purchase, March saw flat consumer spending and a 0.2% downturn in retail sales. (Consumer incomes rose 0.2%.) In related news, America’s first-quarter GDP number was lackluster – the economy grew just 0.7% in the opening three months of the year, according to the initial estimate of the Bureau of Economic Analysis.2,4

Consumer inflation declined 0.3% in March, with core consumer prices down 0.1%. Even after that significant dip, the yearly gain in the headline Consumer Price Index stood at 2.4%. The Producer Price Index ticked down 0.1% in March, leaving annualized wholesale inflation at 2.3%.4

The Institute for Supply Management’s service sector purchasing manager index was at a healthy 55.2 in the third month of the year, though it was 2.4 points below its February reading. ISM’s manufacturing PMI, which had been at 57.2 in March, came in at a still-strong 54.8 for April. Hard goods orders were up 0.7% in March after a 2.3% gain in February.2,5

GLOBAL ECONOMIC HEALTHApril brought news of economic improvement in China. During Q1, the nation’s economy grew at a 6.9% pace – the best pace seen in six quarters. That surpassed the 6.5% target set by its government. Real estate investment had increased 9.1% and fixed-asset investment 9.2% from a year earlier, but the real boost came from a 21.0% year-over-year gain in local and central government spending. Disposable income grew at a yearly rate of 7.0%, a high unmatched since late 2015. Chinese factory growth did fall short of expectations in April, with the nation’s official PMI hitting a 6-month trough of 51.2.6,7

Markit’s eurozone manufacturing PMI hit a 6-year peak in Q1, reaching 56.4; service sector PMIs for Germany, France, and Spain were all above 55 for the quarter. Markit estimated the Spanish economy growing by 0.8-0.9% in Q1, with projected expansion of 0.6% for Germany and France and 0.3-0.4% for Italy. Eurostat, the European Union’s statistical office, estimated euro area inflation at 1.9% in April, 0.4% higher than it had been in March.8,9

WORLD MARKETSIn April, Argentina’s Merval (+4.98%) and France’s CAC 40 (+4.38%) made the biggest upward moves among foreign benchmarks. Spain’s IBEX 35 went +3.15%; Germany’s DAX, +2.38%. Three other major indices gained more than 2% in April: India’s Nifty 50 went +2.23%; the FTSE Eurofirst 300, +2.11%; and the MSCI Emerging Markets, +2.04%.10,11

With stocks once again at or near record levels, commodities mostly cooled off. Gold was certainly an exception: it rose 1.59% last month to settle at $1,269.50 per ounce on the COMEX on April 28. Silver, on the other hand, sank 5.30% to finish April at $17.16. Copper gave back 2.23% for April; platinum, only 0.22%. The U.S. Dollar Index retreated 1.51%.12,13

As for oil, it ended April under $50 – at $49.19 on the NYMEX, to be precise. It lost 3.26% on the month. Unleaded gas took the big tumble among major energy futures, dropping 9.33%. Heating oil’s loss was smaller at 4.36%. Natural gas futures advanced 2.41% for April. Two crops fell particularly hard – cocoa dove 11.94%; coffee, 8.65%. Sugar lost 4.30%. Cotton futures were up 2.34% in April, but corn dipped 2.12%, and wheat, 2.34%. Soybeans were down just 0.05% on the month.12

REAL ESTATEWith the Federal Reserve pledging to tighten as last year ended, who would have guessed mortgage rates would be lower in April than at the start of the year? They were. Freddie Mac’s April 27 Primary Mortgage Market Survey showed average interest on the 30-year FRM at 4.03%; in the January 5 survey, the average interest rate was 4.20%. A year-to-date decline was also evident for the 15-year FRM (3.44% to 3.27%). Average interest on the 5/1-year ARM was 3.12% in April, 3.33% in December. Between March 30 and April 27, the average interest rate on the 30-year FRM lessened 0.11%; for the 15-year FRM and the 5/1-year ARM, the respective descents were 0.12% and 0.06%.14

Existing home sales were up 4.4% in March, according to the National Association of Realtors, a nice change from the (revised) 3.9% February retreat. New home buying, too, improved – the March gain was 5.8%, leaving the annualized advance at 15.6%.4,15

Looking at other housing indicators, the January edition of the 20-city Case-Shiller home price index arrived, showing a 5.8% year-over-year increase. That bettered the 5.6% yearly rise seen in the December edition. The NAR announced a 0.8% retreat for pending home sales during March, contrasting with a 5.5% surge in February. Housing starts fell by 6.8% in the third month of 2017, but building permits rose 3.6%.2,4

LOOKING BACK…LOOKING FORWARDThe Nasdaq Composite surpassed 6,000 for the first time in April, gaining 2.30% for the month. At the closing bell on April 28, the index’s 52-week advance stood at 26.64%. The S&P 500 added 0.91% in April; the Dow Jones Industrial Average, 1.34%. The small-cap Russell 2000 improved 1.05%. April’s stock rally thrust the CBOE VIX south by 12.53%; it ended the month at 10.82. The Nasdaq 100 was the pacesetter among consequential U.S. equity indices in April, rising 2.71%. At the end of April, the foremost equity indices watched by Wall Street settled as follows: DJIA, 20,940.51; NASDAQ, 6,047.61; S&P, 2,384.20; RUT, 1,400.43.1,16

% CHANGE

Y-T-D

1-YR CHG

5-YR AVG

10-YR AVG

DJIA

+5.96

+17.44

+11.66

+5.96

NASDAQ

+12.34

+25.85

+19.41

+13.65

S&P 500

+6.49

+14.86

+13.98

+5.96

REAL YIELD

4/28 RATE

1 YR AGO

5 YRS AGO

10 YRS AGO

10 YR TIPS

0.37%

0.12%

-0.30%

2.25%

Sources: wsj.com, bigcharts.com, treasury.gov – 4/28/171,17,18,19

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

On April 28, FactSet estimated 12.5% blended earnings growth for companies in the S&P 500. If that projected annualized growth rate holds, Q1 will turn out to be the best quarter for earnings growth in nearly six years. Earnings gains will certainly vary over succeeding quarters, but for the near term, this story of solid growth may continue to be the narrative. In early May, the most attention may be paid to the Department of Labor’s latest jobs report (Did the March data amount to an aberration? Did payroll growth pick up in April?) and the Federal Reserve’s newest policy statement (Will the central bank send hawkish or dovish signals?). Most investors are looking at the markets through a bullish lens right now, and barring some abrupt, troubling event, the bulls look ready to run for another month.20

UPCOMING ECONOMIC RELEASES: Here is what investors will watch for in May: the FOMC’s latest policy statement and the April ISM service sector PMI (5/3), the April Challenger job-cut report and March factory orders (5/4), the April jobs report from the Department of Labor (5/5), the April PPI (5/11), the April CPI, April retail sales, and the initial May consumer sentiment index from the University of Michigan (5/12), April housing starts, building permits, and industrial production (5/16), April new home sales (5/23), April existing home sales (5/24), April durable goods orders, the federal government’s second estimate of Q1 growth, and the University of Michigan’s final May consumer sentiment index (5/26), the Conference Board’s latest consumer confidence index, April personal spending, and the April PCE price index (5/30), and then April pending home sales, plus the Federal Reserve’s latest Beige Book (5/31).

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“Do not anticipate trouble, or worry about what may never happen. Keep in the sunlight.”

- Ben Franklin

QUARTERLY TIP

Preventive medical and dental checkups are not just smart for your health; they can also help you save money. Forgo them, and you might face major medical or dental bills stemming from neglecting your health.

A review of Q4 2016

Year-end statements from all of your investment accounts are becoming available for review or download on each institution's website if you have paperless statement option setup. Otherwise, you should be receiving your hard copy in the mail in the coming week. (Please note - statements are NOT posted to your PlanningWorks eMoney Personal Financial Website).

When your 2016 tax documents are produced, you will receive those in the mail.

THE QUARTER IN BRIEFTwo events strongly influenced U.S. and foreign financial markets in the fourth quarter – one unexpected by many, the other widely anticipated. Neither of them particularly upset investors. Donald Trump’s win in the presidential election led to a rally on Wall Street, and the Federal Reserve’s December interest rate hike was taken in stride, even as our central bank’s monetary policy stood out globally for its hawkishness. The S&P 500 ended up gaining 3.25% in three months. The United Kingdom scheduled its Brexit, and OPEC elected to trim oil output for the first time in eight years. Oil rallied, and so did the dollar; precious metals retreated. The housing sector showed strength even as mortgage rates ascended. On the whole, the most-watched U.S. economic indicators were encouraging.1

DOMESTIC ECONOMIC HEALTHOn December 14, the Federal Reserve announced its second quarter-point rate hike in two years. The federal funds rate was reset at the 0.50-0.75% range, and the central bank’s latest dot-plot forecast showed three planned rate moves in 2017 instead of the previously projected two. Fed officials emphasized that oncoming tightening will be “gradual.”2

By November, monthly payroll gains were averaging 180,000 for the year. The main U-3 jobless rate was at 4.9% in October and at 4.6% in November. The U-6 rate that included the underemployed fell from 9.5% in October to 9.3% a month later. In November, the U-3 rate was at its lowest level since August 2007, and the U-6 rate had not been so low since April 2008.3

As Q4 ended, consumer confidence indices looked very impressive. The Conference Board’s monthly index was well over the 100 mark at 109.4 by November, and then it pushed further north to 113.0 in December. The University of Michigan’s household sentiment gauge sat at 87.2 in October, then rose to 93.8 in November and 98.2 for December.4,5

Both the service and factory sectors expanded during fall 2016. The Institute for Supply Management’s non-manufacturing index rose to 57.2 in November from 54.8 in October. November marked the 82nd straight month of service sector growth in America. ISM’s purchasing manager index for the factory sector advanced to 53.2 in November from the prior mark of 51.9, indicating an improved pace of growth. In related news, factory orders rose 0.6% in October and 2.7% in November.6,7

Consumer spending accelerated 0.4% in October, but only half that in November. Consumer incomes rose 0.5% in October, and then flattened a month after that. Core retail sales (minus car and gasoline purchases) followed a similar pattern: up 0.5% in October and 0.2% in November. (Perhaps the December numbers will show more upside.)7

As energy costs rose, the annualized gain in the headline Producer Price Index went from 0.8% in October to 1.3% in November. (By November, the core PPI showed a 1.6% yearly gain.) Consumer inflation remained beneath the Federal Reserve’s 2% target. As of November, the Consumer Price Index was up but 1.7% in 12 months, with the core CPI up 2.1%. The Federal Reserve’s core PCE price index was 1.8% higher year-over-year in October, but that number declined to 1.6% in November.7

GLOBAL ECONOMIC HEALTHThe eurozone economy had expanded only 0.3% in Q3, and by November, euro area yearly inflation was still at 0.6%, with six member nations (among them Greece and Ireland) experiencing year-over-year consumer price deflation. Populist movements in France, Germany, and Italy gained traction, most notably Italy’s Five Star Movement. Italian Prime Minister Matteo Renzi resigned in November after his party’s attempt at constitutional reform was voted down by the electorate; the Five Star Movement has vowed to hold a national vote on whether or not Italy should stay in the European Union if it assumes power in 2018.8,9

Teresa May, the United Kingdom’s prime minister, announced her country would make its Brexit from the E.U. as early as the summer of 2019, by invoking Article 50 of the Lisbon Treaty no later than the end of March. May expected the U.K. to have a full role in E.U. policymaking through 2019. The European Central Bank made a policy decision to keep easing – in December, it announced an extension of its asset-purchase program through the end of 2017; though, the amount of monthly bond buying would be trimmed from €80 billion to €60 billion beginning in April.8,10

The long-awaited OPEC accord to reduce oil production finally came to pass in late November. A 1.2-millon-barrel-per-day cut (effective in January) was eventually agreed to by OPEC and non-OPEC oil producers; though, some analysts felt not all parties to the agreement would comply with its terms. In the Asia-Pacific region, Japan continued its weak economic growth, while the latest statistics showed China’s GDP holding steady at 6.7% in Q3.11,12

WORLD MARKETSLooking at foreign benchmarks, the best price returns of the fourth quarter were largely in Europe. The DAX rose 9.23% during Q4, and the CAC 40 advanced 9.31%. The 13-week gain for the FTSE 100 was not quite so large: 3.53%.13

All that said, those big gains paled next to that of the Nikkei 225. Japan’s major equity index added 16.20% in Q4. Other indices in the Asia-Pacific region and the Americas fell far short of that kind of quarterly performance, but there were other nice Q4 advances. The TSX Composite rose 3.81%; the All Ordinaries, 3.51%. The Shanghai Composite improved 3.29%; the MSCI World, 1.48%. MSCI’s Emerging Markets index and the Sensex both fell 4.56%, while the Hang Seng retreated 5.57%.13,14

COMMODITIES MARKETS Lean hogs led the pack in commodity futures in Q4, with prices rising 35.28%. Oats gained 22.19% in Q4. Among the major commodities, unleaded gasoline led the way with a 15.83% advance; natural gas and copper were close behind, respectively adding 13.71% and 12.75%.15

West Texas Intermediate crude had a fine quarter, gaining 7.59%; oil settled at $53.89 a barrel on the NYMEX on December 30, capping off an advance of 46.12% for the year.15,16

The dollar rally was one factor that turned Q4 into a subpar quarter for precious metals. Palladium sank 5.49% in the final three months of 2016; gold, 12.81%; platinum, 12.85%; and silver, 17.28%. Gold and silver did have a nice year – gold prices rose 7.18% on the COMEX in 2016; silver prices, 15.04%. In crops, the leading Q4 loser was sugar, which fell 15.17%; coffee futures slumped 11.52%.15,16

REAL ESTATE Mortgages grew more expensive in Q4. As the quarter ended, Freddie Mac said that the average interest rate on a 30-year conventional home loan was 4.32%. Mean interest on the 15-year FRM was 3.55%; mean interest on the 5/1-year ARM, 3.30%. Look at how those December 29 numbers compare with the ones from Freddie’s September 29 Primary Mortgage Market Survey: 30-year FRM, 3.42%; 15-year FRM, 2.72%; 5/1-year ARM, 2.81%.17

As home loans became costlier, more buyers stepped forth: existing home sales rose 1.5% during October and another 0.7% in November. That data comes from the National Association of Realtors, whose pending home sales index rose just 0.1% in October and slipped 2.5% the next month. The national S&P/Case-Shiller home price index measures year-over-year price gains for existing homes; its annualized increase reached 5.6% in October, up from 5.4% in September. New home buying rose 5.2% in November after a 1.4% October fall, the Census Bureau reported.4,7

Real estate construction surged in October, but waned with colder weather in November. The Census Bureau said that groundbreaking increased 27.4% in the tenth month of 2016, with a 2.9% boost for building permits. A month later, starts were down by 18.7%, with permits reduced by 4.7%.7

LOOKING BACK…LOOKING FORWARD The fourth-quarter performances, noted in the accompanying table, left the big three U.S. equity indices at the following year-end settlements: Dow Jones Industrial Average, 19,762.60; NASDAQ Composite, 5,383.12; S&P 500, 2,238.83. While the big three all posted Q4 gains, their advances were matched or surpassed by some other benchmarks. The U.S. Dollar Index rose 7.06% for the quarter, and the Russell 2000 gained 8.43%. Unsurprisingly, given some of the quarter’s major commodity gains, the PHLX Oil Service index added 12.33%, and the S&P GSCI index improved 9.25%. Amid all this, the CBOE VIX rose 5.64% to end the trading year at 14.04.1

Treasury yields moved north, especially after the election. The 10-year note’s real yield rose half a percentage point during Q4; it was 0.00% on September 30.19,20

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.

These returns do not include dividends.

Investors are entering the first quarter with a good deal of optimism, but also with an awareness that anything could happen. Wall Street has been bullish on the incoming Trump administration, and that confidence will likely continue as it begins to shape policy in Washington. At the same time, market participants are keeping a cautious eye on the Fed, the strong dollar, and the possibility of a stock bubble inflated by euphoria. Economic signals have looked much better of late than they did a year ago, and the stock market appears to be on much sturdier legs than it was at the beginning of 2016, when it fell precipitously. With the earnings recession having faded away, perhaps the market will get a boost this next earnings season that will lift the Dow above 20,000. For this best-case scenario to emerge, domestic and global belief in the new president and his administration needs to be strong and sustained, and geopolitical events from overseas need to be tolerable for the bulls. It will be an interesting first quarter.

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MONTHLY RIDDLE

If you carry my burden, you will never stand or lie on your back. While I am not rich, I leave a silvery track. What am I?

Last month’s riddle:What grows when it eats, but dies when it drinks?

Lastmonth’sanswer:

Fire.

November 2016

THE MONTH IN BRIEFBulls were reined in during October. The S&P 500 lost 1.94% as Wall Street responded unenthusiastically to the fall earnings season. Even though much of the economic news that emerged in October was good, investors saw an interest rate hike on the horizon and remained concerned about an increasingly controversial presidential race. Consumer confidence waned, but improved manufacturing, consumer spending, and retail sales numbers all factored into stronger growth. New and existing home sales accelerated. The price of oil rose, then quickly fell; the price of gold slipped, then recovered just a bit. Overseas, a timeline was set for the Brexit. In the big picture, appetite for risk waned as investors remained cautious.1

DOMESTIC ECONOMIC HEALTH Economic indicators flashed clear signals that the economy was picking up. Household spending rose a healthy 0.5% during September, the most since June. Household incomes rose 0.3% in the ninth month of the year. Retail sales were up 0.6% for September, with core retail purchases rising 0.5%.2,3

Important twin gauges of business activity showed both manufacturing and service sector growth. The Institute for Supply Management’s non-manufacturing purchasing manager index jumped up to a reading of 57.1 in September, improving 5.7 points. ISM’s factory PMI also recovered from an August spent in contraction territory, rising 2.1 points to 51.5 in September; even more encouragingly, ISM’s new factory orders index increased by 6.0 points.3,4

Complementing all this, the federal government said that the economy grew 2.9% in the third quarter – a real upturn from the 1.4% GDP recorded for Q2.5

Had full employment been reached? Perhaps it was close at hand, since the hiring pace seemed to be moderating. The Department of Labor said that companies had added 156,000 net new jobs in September, while revising the August gain north to 167,000. The jobless rate rose slightly to 5.0%; the U-6 rate including the underemployed remained at 9.7%. Average hourly wages improved another 0.2%.3

Was inflation pressure mounting? Not really. The PCE price index advanced 0.2% in September, which left the core PCE index up 1.7% year-over-year, the same as in August. The Consumer Price Index showed a 1.5% annual gain in September, up from 1.1% a month earlier; core consumer prices were up 2.2% in 12 months, ticking down from 2.3% in August. Producer prices rose 0.3% in September, but that still left them up just 0.7% year-over-year.2,3

Some indicators did descend, most notably those measuring consumer confidence. The Conference Board’s monthly barometer dipped 4.9 points in October to a respectable 98.6 mark, while the University of Michigan consumer sentiment index fell to 87.2 at month’s end. Headline capital goods orders also declined 0.1% for September, with core orders down 1.2%.5

GLOBAL ECONOMIC HEALTHIn London, United Kingdom prime minister Theresa May announced definite plans for the Brexit. The U.K. will invoke Article 50 of the Lisbon Treaty no later than the end of March 2017. Assuming this occurs, the U.K. will leave the European Union in the summer of 2019. Until then, it intends to remain a player in all E.U. summits and member state negotiations. Speaking of the broader E.U., Eurostat reported economic growth of 0.3% for the euro area in Q3 and estimated annualized inflation for the euro area at 0.5% in October.6,7

The World Bank projected 6.7% growth for China in 2016, declining to 6.5% in 2017, and then 6.3% in 2018. It believes that the second-fastest growing economy in Asia this year will be that of the Philippines at 6.4%. Malaysia’s 2016 GDP is projected at 4.2%; Indonesia’s, at 4.8%. China aside, the Bank expects growth to pick up across Asia in the near future, projecting 4.8% growth for the rest of the region’s economies this year, 5% GDP in 2017, and 5.1% growth for 2018. Meanwhile, news arrived that Japan’s retail sales and industrial output were flat in September; retail sales were down for a seventh straight month and 1.9% lower over the past 12 months.8,9

WORLD MARKETSMany foreign indices outperformed ours. To our respective north and south, the TSX Composite advanced 0.42% last month; the Bolsa, 1.62%. Argentina’s MERVAL rose 7.16%. European indices had a good month – there were gains of 1.47% for the DAX, 1.37% for the CAC-40, 4.81% for the IBEX 35, 0.59% for the Micex, and 0.80% for the FTSE 100. The FTSEurofirst 300 was an exception, losing 0.90%.10

The Nikkei 225 soared 5.93% during October to pace the major Asian indices. The Shanghai Composite was not that far behind, rising 3.22%. October also brought gains of 0.66% for India’s Sensex and 2.49% for the FTSE Taiwan 50. Australia’s All Ordinaries retreated 2.22%, and Hong Kong’s Hang Seng, 1.56%. The MSCI World index lost 2.01%, but the MCSI Emerging Market index rose 0.18%.10,11

COMMODITIES MARKETS

As the Halloween trading day drew to a close on Wall Street, a look at the COMEX and NYMEX showed monthly losses for both gold and oil. The yellow metal slipped 3.27% for the month, settling at $1,276.70. Light sweet crude dropped to $46.76 at month’s end with oil investors still awaiting finalization of OPEC’s deal to restrain output; futures took a 2.68% fall for October.12

REAL ESTATEAside from a drop in groundbreaking, the news out of this sector was decidedly upbeat. New home sales rose 3.1% in the ninth month of 2016, taking the 12-month advance to 29.8% and leaving the pace once again near a 9-year high. Meanwhile, the National Association of Realtors noted a 3.2% monthly advance for existing home sales.3,13

Home prices – as measured by the 20-city S&P/Case-Shiller index – were up 5.3% year-over-year as of August, compared with 5.0% in the year ending in July. The Census Bureau said that building permits increased 6.3% for September; though, housing starts did retreat 9.0%. Pending home sales were up 1.5% for September according to NAR.3,5

Mortgages grew more expensive last month. By October 27, the mean interest rate for the 30-year FRM was at 3.47%, according to Freddie Mac’s Primary Mortgage Market Survey, while average rates on the 15-year FRM and the 5/1-year ARM respectively stood at 2.78% and 2.84%. Back on September 29, the mean rate on the 30-year loan averaged 3.42%; the average interest on the 15-year fixed was 2.72%; and the mean interest on the 5/1-year adjustable rate mortgage was 2.81%.14

LOOKING BACK…LOOKING FORWARDAll three major U.S. equity indices lost ground in October. The blue chips retreated least – the Dow Jones Industrial Average gave back 0.90% for the month. Dropping 2.31%, the Nasdaq Composite exceeded the S&P 500’s 1.94% loss. The Russell 2000 stumbled 5.42%. Unsurprisingly, considering all this, the CBOE VIX soared 29.42% with uncertainty rising on Wall Street. The Halloween settlements: DJIA, 18,142.12; NASDAQ, 5,189.13; S&P, 2,126.15; RUT, 1,191.39; and VIX, 17.06. The VIX outgained all consequential U.S. indices last month by a wide margin; the PHLX Utility Index logged the biggest advance among the equity indices for October, rising 1.12%.1

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

At this writing, it seems highly unlikely that the Federal Reserve will authorize an interest rate hike at the start of November, as the Federal Open Market Committee has historically preferred to refrain from any policy decisions that could influence presidential elections. According to FactSet data, year-over-year earnings growth is apparent for the first time since Q1 2015 (blended Q3 earnings growth was at 1.6% through Halloween). Still, there is nothing resembling a bull run as we enter November. Hopefully, some risk appetite will return after the election, and investors will view solid economic indicators as validations of an improving economy, first, and as further evidence for a federal funds rate increase, second. Wall Street could see a lot of volatility this month, not merely reflective of the election. We can only hope the evident tension among institutional investors eases and the market surprises to the upside.18

UPCOMING ECONOMIC RELEASES: After the Federal Reserve policy statement on November 2, the rest of the major items on the economic release slate arrives in this order: the ISM October non-manufacturing PMI; September factory orders and the October Challenger job-cut report (11/3); the Department of Labor’s October employment report (11/4); September consumer credit (11/7); the preliminary November consumer sentiment index from the University of Michigan (11/11); October retail sales (11/15); the October PPI and October industrial output (11/16); the October CPI and October housing starts and building permits (11/17); October existing home sales (11/22); the final November University of Michigan consumer sentiment index, October new home sales, October capital goods orders, and the minutes from the November Federal Reserve policy meeting (11/24); the newest consumer confidence index from the Conference Board, the September S&P/Case-Shiller home price index, and the second estimate of Q3 growth (11/29); and then the November ADP payrolls report, a new Federal Reserve Beige Book, and October PCE prices, consumer spending, and pending home sales (11/30).

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THE QUARTER IN BRIEF
The economy seemed to hit a soft patch this summer, but stocks carried onward and upward - the S&P 500 advanced for a fourth straight quarter in Q3, rising 3.31%. Markets were notably placid for much of the quarter, even with two major banking scandals, multiple terror attacks, and the latest dispatches from an especially contentious presidential race in the headlines. As Q3 went on, the Federal Reserve all but signaled to investors to expect a rate hike before the end of the year. Home sales, residential construction, factory activity, and consumer spending seemed to wane in the quarter, but consumers grew more confident.1

DOMESTIC ECONOMIC HEALTH
As Wall Street mulled over the chances of a fall interest rate increase, some economic indicators pointed to a summer slowdown. In August, the Institute for Supply Management's manufacturing purchasing managers index went under 50 (49.4), meaning the sector had contracted for the month. Both industrial and manufacturing production declined 0.4%. Durable goods orders, up 3.6% for July, were suddenly flat. Retail sales fell off by 0.3%, and personal spending was flat after an 0.4% gain in July (personal incomes did manage to rise another 0.2%).2,3

The pace of hiring also moderated in August, though July's number was revised upward in September. Employers added 275,000 new jobs in July, 151,000 for August. The headline jobless rate (4.9%), the U-6 rate counting the underemployed and the unemployed (9.7%), and the labor force participation rate (62.8%) were exactly the same in both months.4

Other indicators were less dismal. As September ended, the federal government said the economy grew at a 1.4% pace in Q2 - not very good, but better than the 1.1% growth previously estimated. Additionally, ISM's service sector PMI remained above 50 in August at 51.4 (though that number was decidedly lower than the 55.5 mark from July).3,5

Accentuating the positive, consumers grew more upbeat as the quarter went on. In July, the Conference Board announced a reading of 97.3 for its consumer confidence index; in August, the CB said the gauge was at 101.1, and in September it reached 104.1. Across the quarter, the University of Michigan's monthly measure of household sentiment rose slightly from 90.0 in July to 91.2 for September (including a dip to 89.8 for August).6,7

Consumer inflation picked up, but wholesale inflation did not. By August, the Consumer Price Index had advanced 1.1% in a year, as opposed to 0.8% in the 12 months ending in July. Core consumer prices were up 2.3% year-over-year by August. In annualized terms, the Producer Price Index showed no change from a year earlier in August; in monthly terms, the PPI fell 0.4% in July and was flat a month later. Core inflation, as measured by the Federal Reserve, increased 0.1% in July, 0.2% in August.2,3

Speaking of the Federal Reserve, it left interest rates alone during Q3. It did, however, clue Wall Street in on the probability of a Q4 rate hike: its latest dot-plot forecast showed consensus for one, and the vote against raising the federal funds rate at its September policy meeting was close (7-3). After the vote was announced, Fed chair Janet Yellen remarked that FOMC members were "generally pleased with how the U.S. economy is doing" - a notably sunny viewpoint. On September 29, she made further headlines by commenting how useful it would be if the Fed could buy securities and corporate bonds to stimulate the economy in a recession (something it is currently prohibited from doing).8,9

Wells Fargo certainly made headlines in Q3. In September, its CEO was brought before Congress after news broke that employees had opened as many as 2 million fake accounts in pursuit of sales goals. The bank was contending with $190 million in fines and severe damage to its reputation when the quarter ended.10

GLOBAL ECONOMIC HEALTH
Trouble at another, even larger banking giant emerged during Q3. Deutsche Bank looked increasingly shaky after failing the U.S. government's bank stress test early this summer and barely passing the equivalent test in the European Union. S&P Global Ratings lowered its outlook for DB to negative. By the end of the quarter, CNBC and AFP were reporting that DB was trying to negotiate $14 billion in fines it owed to the Department of Justice down to the $5 billion level; indications were that the German government had no intention to bail the bank out should its situation worsen.1,11

Economic indicators pointed at a less stagnant E.U. economy during the summer after the Brexit. Eurostat projected 0.4% consumer inflation in September, rising from 0.2% in August; the euro area jobless rate stayed at 10.1% in both July and August, the lowest level observed since July 2011.12

In September, OPEC nations agreed to reduce oil production for the first time since 2008. The agreement, to be finalized in fall, would essentially restore the production limits that were in place back in 2015. Previously, Saudi Arabia had held out on such an agreement, saying it would cut production only if all other OPEC and non-OPEC oil-producing nations vowed to do so.13

WORLD MARKETS
Benchmarks generally climbed higher in the third quarter, affirming that 2016 has turned into a good year for stocks. By the end of Q3, the U.K.'s FTSE 100 was up 13.82% year-over-year, and Germany's DAX had seen an 8.80% 12-month advance. Other impressive year-over-year gains: 20.39% for Russia's Micex, 11.76% for the Hang Seng in Hong Kong, 28.81% for Brazil's Bovespa, 14.07% for the MSCI Emerging Markets index, and 10.66% for the TSX Composite in Canada. The MSCI World index had risen 9.09% in 12 months; India's Sensex, 6.54%.14,15

The past four quarters had not been so kind to some other indices. As the third quarter ended, Italy's FTSE All-Share had lost 21.06% in a year; Spain's IBEX 35, 8.16%; France's CAC-40, just 0.16%; China's Shanghai Composite, 1.55%; and Japan's Nikkei 225, 5.40%.14

COMMODITIES MARKETS
Precious metals remained on track to log an impressive 2016 comeback. Gold lost just 0.3% in the quarter, which still left it up 24.2% YTD. The yellow metal closed the quarter at $1,317.10 on the COMEX. Silver wrapped up September at $19.21, rising 3.2% in the quarter and gaining 39.2% through three-fourths of 2016. Platinum advanced 1.0% in Q3; palladium, 20.8%. That brought their respective YTD gains to 15.8% and 28.4%.16

Like gold, WTI crude was nearly flat for the quarter. Futures lost just 0.2% in Q3, finishing September at a NYMEX price of $48.24. Heating oil rose 2.9% in Q3, while unleaded gasoline retreated 0.9%.1,19

REAL ESTATE
Home sales and housing starts tapered off during the quarter. Existing home sales slipped 3.4% in July and another 0.9% in August as inventory slimmed; the National Association of Realtors also said pending home sales were up 1.2% in July, but down 2.4% a month later. In July, the Census Bureau announced that new home sales were up a whopping 13.8% and near an all-time peak, but then they fell 7.6% in August. Housing starts were up 1.4% for July; building permits, down 0.8%. In August, permits were down another 0.4%, with groundbreaking reduced by 5.8%. The year-over-year advance in the monthly editions of the 20-city Case-Shiller home price index kept shrinking - it was 5.1% in June, 5.0% in July.2,3

Home loans, broadly speaking, grew slightly less expensive across Q3. The September 29 Freddie Mac Primary Mortgage Market Survey specified the following average interest on the three common mortgage types: 30-year FRM, 3.42%; 15-year FRM, 2.72%; 5/1-year ARM, 2.81%. Compare those numbers with these from the June 30 PMMS: 30-year FRM,3.48%; 15-year FRM, 2.78%; 5/1-year ARM, 2.70%.20

LOOKING BACK...LOOKING FORWARD
Tech shares and small caps set the pace in the third quarter - the Nasdaq Composite leapt 9.69%, while the Russell 2000 posted a 3-month gain of 8.20%.1,21

The Dow ended the quarter at 18,308.15; the NASDAQ, at 5,312.00; the S&P 500, at 2,168.27; and the RUT, at 1,251.64. The RUT's YTD mark at the end of Q3 (+10.19%) surpassed the YTD performances of the big three.22

Concluding the quarter at 13.29, the CBOE VIX retreated swiftly this summer. Its Q3 loss was 10.02%, leaving the "fear index" down 27.02% YTD.23

% CHANGE

Y-T-D

Q3 CHG

1-YR CHG

10-YR AVG

DJIA

+5.07

+2.11

+12.43

+5.68

NASDAQ

+6.08

+9.69

+14.97

+13.52

S&P 500

+6.08

+3.31

+12.93

+6.23

REAL YIELD

9/30 RATE

1 YR AGO

5 YRS AGO

10 YRS AGO

10 YR TIPS

0.00%

0.65%

0.17%

2.27%

Sources: wsj.com, cnbc.com, bigcharts.com, treasury.gov - 9/30/161,22,24,25 Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.

This is the time of year when bulls yearn for an extended rally. Will they get it? Will S&P 500 earnings surpass (low) expectations? Will the market confidently ride through the election, whatever the outcome? Will it simply and calmly price in a rate hike, assuming that happens? Will investors shrug off any unsettling headlines, whether from home or from overseas? If the market can answer "yes" to those last four questions, the quarter could see impressive gains for the major indices. According to S&P Global Market Intelligence research, the S&P 500 has risen an average of 5% in the fourth quarter since 1990, and advanced in the fourth quarter more than 70% of the time since 1945. The past has little or no influence upon future market behaviors, but even with continued slow economic growth, the overall market mood is still bullish - so perhaps investors will look at earnings first this quarter, then other factors. It is sure to be an eventful and possibly turbulent three months.26

August 29, 2016 – U.S. stocks fell fractionally for a second week after Fed Chair Janet Yellen’s highly anticipated speech in Jackson Hole, Wyoming conveyed no new insights on when the central bank may raise interest rates. Yellen said the case to “raise interest rates has strengthened in recent months” as the economy approaches the central bank’s goals, but she refrained from discussing specific timing. However, following an hour-long rally after Yellen’s speech, Fed Vice Chair Stanley Fischer said in a CNBC interview that he saw Yellen’s comments were consistent with a September rate hike and a subsequent 2016 increase could follow as early as December. Fischer’s comments sent the S&P 500 tumbling 20-points and sparked a Friday jump in the implied odds for a September hike from 24% to 30%, and up to 42% by Monday morning.

In economic data, new home sales unexpectedly jumped over 12% in July to an almost nine-year high, while July existing home sales fell 3.2%, their first drop since February. Meanwhile, durable goods orders increased 4.4% last month, while orders for business equipment (a sub-set of durable goods orders) rose for a second month, up 1.6%, the most since January. On Friday, Commerce officials downwardly revised their estimate for second quarter GDP growth from 1.2% to 1.1%, while governmental data showed U.S. corporate profits fell 2.2% from year ago levels. Lastly, the University of Michigan’s final August reading of consumer confidence fell to a four-month low.

For the week, the S&P 500 slipped 0.67%, ending the week with its first three-day slide in two months. The Dow Industrials lost 0.85%, while the NASDAQ Composite edged 0.35% lower. Eight of the ten major sectors ended negative, with Utilities (-2.21%), Healthcare (-1.80%), and Energy (-1.34%) falling the most. Financial (+0.37%) and Technology (+0.05%) outperformed. Total trading volume slowed to an average of 5.8 billion per day last week, the slowest non-holiday weekly average since June 2015. The US Dollar Index strengthened last week, rising to 95.566. Crude oil futures fell by 3% last week, ending at $47.64/oz., while gold retreated 1.5%. Treasury prices also declined last week, pulling the yield on benchmark 10-year Treasury notes up 5.1 basis points to 1.630%.

After digesting Fed Chair Janet Yellen’s speech at Jackson Hole, Wyoming on Friday, markets were encouraged that the economy was getting strong enough to endure a second rate hike in December, a full year after the first one. Then Vice Chair Fischer clarified that both September and December were in play. The equity markets’ intra-day price surge then folded like a poker player with an empty hand. Yet the S&P SmallCap 600 closed higher on the week, unlike its large-cap sibling. In the S&P Dow Indices chart above, we see the S&P SmallCap 600 Index most recently rising 1.16% month-to-date in August, whereas the S&P 500 is up just 0.04% (red line, essentially unchanged so far this month).

According to S&P Global Market Intelligence, several factors may explain this rotation: foremost of which is the current “Fishcher view” for more than one rate hike during the remainder of the year. This view, again according to S&P foreign yield-starved investors may be attracted to the heftier relative payout of U.S. fixed income, pushing up the value of the U.S. dollar, which would likely have a deleterious effect on U.S. exports. In the past 36 months, the S&P 500 has recorded a 0.72 monthly correlation with the U.S. Dollar Index (DXY) versus a correlation of 0.55 for the S&P SmallCap 600. And don’t think the Fed will be put off by an upcoming presidential election. The Fed has raised short-term rates six times in the third quarter of election years since WWII: 1948, 1956, 1980, 1988 and twice in 2004.

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